Economic Aspects of Decentralized Government: Structure, Functions and Finance

Abstract

Local government Gordon Hughes and Stephen Smith Many OECD countries are uncomfortable with the structure and financing of their decentralized governments. In some, the pressures for change have even led to tax revolts. Much of the existing economic literature on decentralization considers that the purpose of local governments is to decentralize decisions. Lower tiers of government are assigned local public goods and matching taxes. This contrasts with actual arrangements. The patterns of government decentralization in OECD countries are diverse. Most local governments in Europe actually perform a major administrative role, in effect acting as agents for the central government. While this is justified by the advantages that local governments have over central governments in terms of information and control by voters, such arrangements require large financial resources, and more control by central government than where local governments simply provide local public goods. A drawback is the potential for conflict between different tiers of government. The trend towards more decentralization, common to most countries, has had to be met by more taxation or more grants. The need for revenue has encouraged a move away from property taxes to broader-based local taxes. Tax-sharing arrangements have often been under-rated, but in practice they compare favourably with complex and discretionary systems of transfers between levels of government.